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Taxes on Rich Rise with Fiscal Cliff Deal

Congress and President Obama did not have much of a winter break as they scrambled to come up with a solution to the so-called “fiscal cliff”, which threatened to send the economy back into recession.

Speaker of the House John Boehner leaves the second House Republican Caucus meeting of the day during a rare New Year’s Day session. Later that day he helped pass legislation to avert the “fiscal cliff”.

At 10:45pm on New Year’s Day, almost 24 hours after the deadline had passed, members of the House of Representatives approved a bill passed by the Senate a day earlier that shielded the majority of Americans from the effects of the “cliff”.

The fiscal cliff was a set of automatic tax increases and budget cuts that would have affected everyone, as well as businesses and the military.

Republicans and President Obama’s team, led by Vice President Joe Biden, negotiated from Christmas until New Year’s Day, when taxes were scheduled to go up dramatically for all Americans. Tax deductions for children would have decreased $1000 to $500 per child, hitting large families hardest. The deal keeps the deductions at $1000.

The groups that will feel the biggest effect of the deal are the highest earning individuals and families. The final deal raises taxes on families earning more than $450,000.

Democrats are calling the deal a victory for the President. Most Republicans are unhappy with the deal and those who did vote for it did so to avoid being blamed for a middle-class tax fiasco.

“I personally hate it,” Rep. John Campbell of California said of the measure, “The speaker the day after the election said we would give on taxes and we have. But we wanted spending cuts. This bill has spending increases. Are you kidding me? So we get tax increases and spending increases? Come on.”

Obama addressed reporters after the passage of the deal in the House. Previously, he and Speaker Boehner had failed to negotiate a plan that would pass in the House.

The devil in the details of the “fiscal cliff” deal

The tax rate for individuals making more than $400,000 and couples making more than $450,000 will rise from the current 35 percent to 39.6 percent.

Itemized deductions, expenses taxpayers can report on their federal income tax returns in order to decrease their taxable income, will be capped for individuals making $250,000 and for married couples making $300,000.

Unemployment insurance for two million people will be extended for a year.

Child care, tuition and research and development tax credits will be renewed.

The deal included a few strange details. It fixed a quirk in a farm-related law that would have doubled the price of milk in a few weeks. A tax credit for purchase of some electric vehicles with two or three wheels, such as scooters, was also extended, as was the so-called “NASCAR tax credit” that allows speedways to write off their costs over seven years. Typically, such expensing occurs over a much longer period of time, from 15 to 39 years.

Despite deal, payroll taxes set to rise

In spite of last-minute negotiations, Americans are still likely to receive smaller paychecks because of a separate battle over payroll taxes. That’s because the legislation did nothing to renew a 2 percent “holiday” from the Social Security payroll tax that was enacted in 2009.

This means Americans earning the national average salary of $41,000 will receive $32 less on every biweekly paycheck. The higher the salary (up to $113,700), the bigger the bite.

Payroll taxes are key for financing Social Security, and the break of the past two years has forced the government to replenish the funds with borrowed money.

Upcoming battles

Although the House passed a Senate-approved deal that kept the federal government from going over the so-called fiscal cliff, further confrontation is likely.

Many Republicans were unhappy that the legislation did not include significant spending cuts in health and other social programs, which they say are essential to any long-term solution to the nation’s debt. They decided they would save their fire for the next political battles — the effort to increase the nation’s debt ceiling again in another month or two and an expiring government-wide spending bill.

Although Republicans hope to fight for more spending cuts in the debt-ceiling vote, President Obama warned against that tactic.

“While I will negotiate over many things,” he said, “I will not have another debate with this Congress over whether or not they should pay the bills they’ve already racked up through the laws they have passed. Let me repeat: we can’t not pay bills that we’ve already incurred.”

— Compiled by NewsHour Extra

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